Tagged: on exchange trading

This is a good solution to the simulated trading platform problems. It combines a simulated platform with a professional real platform – allowing you to trade on the real exchange. The info is intended for UK traders- but if it’s possible there- it might be possible to create a bypass program in the US.

MT4 ECN Bridge Explained – What is an MT4 ECN Bridge

As a rule, retail traders are not true professional traders, and they do not have the financial muscle that real professional traders can muster. Most professional traders are either trading billions of dollars for high net-worth clients or are managing accounts on behalf of their brokerage houses. They may also be trading as staff of investment banks and other financial institutions. They have the money and they have the tools. They use a different kind of trading platform built exclusively for professional trading activities.

In contrast, the MT4 platform was designed for retail traders. It is used by brokers who maintain dealing desks.

How do dealing desks operate?

The trading sequence is that pricing is obtained from liquidity providers in the market, and these prices are passed on to the brokerages to send to their clients. Usually several liquidity providers provide pricing. Broking houses that use the MT4 platform maintain a dealing desk which acts as the intermediary/counterparty in each of these trades. The dealing desks buy the underlying asset at the cheapest price from the prices sent by the various liquidity providers, and then sell these assets (as the counter-party) to the retail traders. Normally the spreads are fixed. Under such an arrangement, the trader is essentially trading against the broker.

If prices move during processing of a trade order, the trader will get a re-quote, or will be given a price that is above the entry price (slippage). If you use an MT4, this is the condition under which you are trading. The broker is both a player and an umpire! Furthermore, the MT4 was not built to trade in the ECN-style, direct-market access environment.

In contrast, Electronic Communication Network (ECN) brokers do not operate dealing desks, so traders get the prices as they are from the liquidity providers. As a result, the trader will have up to 10 different prices to choose from. In the same vein, an entry order is sent straight to the liquidity providers for execution. As such, slippages and re-quotes are uncommon, spreads are not fixed, and the playing field is more level as the trader is not trading against the broker. However, retail traders are not usually found here because of the stiff capital requirements. An example of this platform is the Currenex platform. This is the preferred platform of choice for professional traders as they cannot afford to be trading in the lopsided conditions found with MT4 brokers, especially with the huge amounts they trade. The problem is, the platforms are complex and cannot be easily used by non-professional traders.

So how do we combine the benefits of the user-friendly MT4 platform with the obvious benefits of using an ECN trading platform?

The solution is to create an MT4-ECN bridge.

An MT4-ECN bridge involves setting up a virtual bridge between an MT4 trading platform and an ECN trading environment using an A Programming Interface (API). This will connect the trader to the price feeds that are obtainable from the liquidity providers and also enable straight-through processing of orders from the MT4 to the liquidity providers, thus bypassing the dealing desks.

MT4-ECN Bridge – How does it work

When a trader places an order, the information is routed from the MT4 server to the ECN bridge. The bridge will relay a message to the MT4 to allow the trader to have the order. The MT4 server will confirm this. When the price is at the displayed price on MT4, another message is relayed from the MT4 server to the bridge, informing the bridge about a change in price. The bridge will then ask the MT4 server to display the pending orders and compare them with the last prices. The bridge will then send a “fill or kill” order at the last price that was received by the bridge. The bridge then fills the order usually at one or two pips lower than the displayed MT4 price. This price will usually be the same price displayed by a liquidity provider but which has been marked up by a normal dealing desk.

How to Create an MT4-ECN Bridge

There are several reasons for wanting to create a MT4-ECN bridge. Firstly, if you do not have up to $50,000 as demanded by ECN brokers for opening an account, then you do not qualify to trade on an ECN platform. Secondly, you may already have a MT4 account but cannot stand some of the funny practices by the dealing desks of your broker. Maybe you just want a little bit more transparency in pricing; this is where the bridge will work for you.

If you want to start using a MT4-ECN bridge, here is how you can do it.

You can use a broker that already has this bridge. One such broker that makes such a claim is FXOpen, but the fact is that there is no way of knowing if this is for real or just a marketing hype.

You can purchase similar applications from commercial vendors.

Get a programmer to build one for you. You can easily do this on freelance work sites.

Advantages of the MT4-ECN Bridge

The trader trades in an ECN environment. This is because the order process earlier described is encrypted and cannot be seen by the dealing desk

All orders, stops and targets are not seen by the dealing desk until they are filled

There are no-requotes

The trader sees all the prices from the liquidity providers and selects the price which suits him best.

You can trade with your expert advisors

Disadvantages of MT4-ECN Bridge

Experts advisors coded with a 4-digit pricing system will not work with the MT4-ECN bridge (which is based on a 5-digit pricing system).

Profit targets and stop loss levels cannot be set before the trade is executed. They can only be set after the execution of the trade.

The only types of orders allowed on MT4-ECN bridges are “fill or kill” orders. As such, a trader cannot close positions sequentially. What does this mean? If a trader has 0.5 lots open, he cannot close 0.2 now and then 0.3 later. He has to close all positions at the same time. This puts an extra risk element to a trade as profits cannot be taken along the way.

Despite the seeming disadvantages, the advantages of using an MT4-ECN bridge far outweigh them and traders who use MT4 exclusively are encouraged to try the bridge out.

Zecco Forex, Inc (“Zecco Forex”) acts as an introducing broker to GAIN Capital Group, LLC (“GAIN Capital”). Your account is held and maintained at GAIN Capital who serves as the clearing agent and counterparty to your trades. GAIN Capital is a registered FCM and RFED with the CFTC and member of the NFA (NFA ID # 0339826).

Trading off-exchange foreign exchange on margin carries a high level of risk and is not suitable for all investors. Trading through an online platform carries additional risks.
Please refer to our more detailed Risk Warning, and NFA’s FOREX INVESTOR ALERT.

In August 2003 NFA issued an Investor Alert discussing the risks of trading in the retail off-exchange foreign currency (forex) market. Since that time, participation in forex trading by retail investors has increased dramatically. There are current 37 active Forex Dealer Members registered with NFA. These 37 firms hold over $800 million in customer funds.

Unfortunately, the amount of forex fraud has also increased dramatically. Since 2001, the Commodity Futures Trading Commission (CFTC) has filed 93 enforcement actions in federal court against hundreds of firms, owners and employees for defrauding over 25,000 customers who lost over $395 million in forex schemes. In addition, NFA has taken enforcement actions against a number of its Forex Dealer Members.

It is critical, therefore, that individuals who are considering participating in the forex market understand the risks associated with this product and conduct due diligence before making any investment decisions.

Although forex dealers must be regulated, firms and individuals can solicit retail accounts for forex dealers and manage those accounts without being subject to any regulatory requirements. There are currently more than 2,000 such firms and individuals. If you are contacted by one of them, either through a telephone call, an e-mail message or a Web site, find out if they are regulated. If they are not, you may be exposed to additional risks.

Be aware of investment schemes that promise significant returns with little risk. Be very cautious and closely monitor any investment you do make.

Because the forex market is volatile, fluctuations in the foreign exchange rate between the time you place the trade and the time you attempt to liquidate it will affect the price of your forex contract and the potential profit and losses relating to it.

Only a relatively small amount of money can enable you to hold a forex position for much more than the account value. This is referred to as leverage or gearing. If the price moves in an unfavorable direction, high leverage can produce large losses in relation to your initial deposit. In fact, even a small move against your position may result in a large loss, including the loss of your entire initial deposit and the liability for additional losses.

Forex transactions are not traded on an exchange.Therefore, under the U.S. Bankruptcy Code, your funds may not receive the same protections as funds used to margin or guarantee exchange-traded futures and options contracts, which receive a priority in bankruptcy.

For additional information on retail forex trading, you should consult NFA’s brochure, “Trading in the Retail Off-Exchange Foreign Currency Market: What Investors Need to Know.” NFA has also developed a Forex Online Learning Program, an interactive self-directed program explaining how retail forex contracts are traded, the risks inherent in forex trading and steps individuals should take before opening a forex account. Both the brochure and the online learning program are available at no charge to the public in the Investor Learning Center section of NFA’s Web site (http://www.nfa.futures.org).

As mentioned above, retail off-exchange forex trading carries a high level of risk and may not be suitable for all investors. The possibility exists that you could lose all of your initial investment and be liable for additional losses. Therefore, you should not invest money that you cannot afford to lose. Be aware of all the risks associated with forex trading and make an informed decision after consulting with your financial advisor and considering your own financial situation and objectives.